Econ Last Final Study Guide

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University of Nevada, Reno *

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103

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Economics

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Feb 20, 2024

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Part 1: Salient Economic Concepts 1. Define what it means to save, and explain why the U.S. economy might grow at a faster rate if people saved more. (5 points) In class notes: Savings Means not spending, not spending on consumption, purchase stock instead, put it in the bank, interest rates. Investment = Productivity= Economic growth Saving is the process of setting aside a portion of current income for future use, or the flow of resources accumulated in this way over a given period of time. A higher saving rate will result in a higher level of physical capital over time, allowing the economy to produce more goods and services 2. Use your understanding of the autonomous spending multiplier concept to explain why a new large construction project will tend to positively impact more people in the community than just those directly working on the project. (5 points) In class notes: One person spending income from project at local business leads to a positive impact in the community New construction projects attract customers and foot traffic, allowing local businesses to flourish and contribute to the economic growth of the neighborhood. This translates into increased revenue, job creation, and a stronger sense of community. 3. In an investments class, using money in a savings account to buy stock in a company would be called making an “investment.” However, macroeconomists use the word investment in a different way. Explain how the word investment is used in macroeconomics and give an example of an investment good. (5 points) In macroeconomics. Investment “ consists of the additions to the nation’s capital stock of buildings, equipment, software, and inventories during a year” An example of an investment good is the manufacturing equipment at a product factory, or buildings that hous businesses along with the equipment that businesses use to supply goods and services to consumers. 4. When you buy most consumer electronic items and appliances, you will be offered an extended warrantee. Use your understanding of the principles of insurance to explain why in may well NOT make sense to buy an extended warrantee. Yet, also explain why in may well make sense to buy insurance to protect against a large possible loss, like the loss of a home. (5 points) Extended warranty coverage may not be applicable in all situations. Extended warranties don’t cover everything that could potentially go wrong with your new purchase, and if you’re

considering purchasing one, it’s a good idea to really dig into that fine print to see what exactly it’ll cover. It is also important to know that companies are known to make a profit off of these extended warranties by feeding off consumers feelings about risk. People believe that a product is far more likely to break than it actually is. The average consumer loses money on an unused warranty. Your home is more than just shelter; it’s an asset worth protecting. Homeowners insurance policies usually contain a package of coverages that offers protection when a peril occurs. A peril is the cause of a possible loss, like a fire, that you protect yourself from wheny ou purchases an insurance policy Part 2: Stats-Book and Theory Questions Note: When analysis is warranted, more credit will be given for answers that use the diagrams presented in class. More credit will also be given for answers that include a “story” providing an intuitive explanation of the situation. For stats-book questions, more credit will be given for more specific answers. 5. Consider an economy that is in a significant recession where the unemployment rate is relatively high. Propose a change in government policy that will help lift the economy out of the recession and reduce the unemployment rate. Perform an analysis where you explain why the policy you propose will lift the economy, identifying the various impacts it will have in the product market and labor market. (20 points) 6. The U.S. is currently experiencing relatively high inflation, and classical monetary theory indicates that inflation tends to be caused by higher prices. What is the approximate inflation rate today, and how does this compare to the past? Is there any evidence that changes in the nation’s money supply might be causing this inflation as proposed by classical monetary theory? (10 points) Monetary theory posits that a change in money supply is a key driver of the economy. A simple formula, the equation of exchange, governs monetary theory: MV=PQ. The Federal Reserve (Fed) has three main levers to control the money supply: the reserve ratio, discount rate, and open market operations. 7. As the U.S. economy has developed, the production of the nation has increased and the average living standard has improved. Present statistics that indicate just how fast production tends to increase on average and just how fast the living standard improves. For full credit, use the rule of 72 as you answer this question. (10 points)

8. Economists normally assume people, including the decision-makers in business, are self- interested (which is different than assuming they are greedy, though people may well be greedy). Present an analysis that explains why technological improvements will not only tend to cause economic growth, but also force self-interested business people to increase the wages and living standards of their workers even though they have a self-interest that discourages them from doing that. (20 points) 9. The budget deficit in the U.S. is large in absolute terms and large compared to the past. Give some indication of the size of the total budget deficit of the government in the U.S.. Then, propose a fiscal policy change that could reduce the budget deficit. Then, perform a composition of output analysis to show how the change you suggest will change the composition of output. Finally, using words, identify the benefit and the cost of the change you have proposed. (20 points)

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